E-Commerce China Dangdang Is in Danger

Online retailer E-Commerce China Dangdang (NAS: DANG) is racing ahead into danger as its business slows. Despite revenues rising 53% year over year, it's suffering from a dramatic slowdown in the rate of growth in its operations. Active customers grew 23% in the second quarter to 5.7 million, but that's almost half the 44% growth rate it achieved in the first quarter, and was 6.5% below the numbers recorded then. Last year it notched better than 38% growth.

The drop in customers no doubt also led it to seeing total order growth fall (20% vs. 33% last year) as well as slowing growth in media revenues and general merchandise. At the same time, expenses rose, accounting for nearly 87% of revenues compared to almost 86% in the year-ago period. Slowing growth, rising costs, and widening losses are big red flags. Needless to say, Dangdang's stock is down 30% year over year.

E-Commerce China Dangdang snapshot

Market Cap

$406 million

Revenues, TTM

$699 million

1-Yr. Stock Return

(30%)

Return on Investment

(36.2%)

Est. 5-Yr. EPS Growth

53.3%

Dividend & Yield

NA / NA

Recent Price

$5.08

CAPS Rating

**

Source: FinViz.com.

A dang shameIn the past I worried precisely about these growth issues at the e-commerce site. It was growing at exactly all the wrong points -- expenses -- and falling where it mattered. I also suspected it got off to a big jump in the markets because like every other me-too operation out there, investors were blowing it up as the Chinese Amazon.com (NAS: AMZN) . Now that the mania has subsided, it's becoming clearer that a lot of the growth these stocks have achieved has been a result of government spending. With the economy coming in for a hard landing, they're not able to stand on their own.

Admittedly, I was swayed earlier this year by the analysis of my colleague Jeremy Phillips who suggested that unlike Renren (NAS: RENN) (China's Facebook!) or Youku Todou (China's YouTube!), Dangdang positioned its business "closer to a consumer's wallet." It really is following Amazon's playbook of growing market share by sacrificing profits for the time being.

Laws of gravityThe fact is, China's economy is grinding to a halt. Even Beijing realizes that, which was part of the reason behind its announcement of a massive 1 trillion renminbi stimulus package. Yet as the Fool's Justin Loiseau correctly points out, don't think the Chinese consumer is going to benefit from this. It's a cash transfer to the coal miners and steelworkers as the spending plan is aimed at infrastructure. There may be some trickle-down benefits, but it won't be anywhere near enough to move the needle for companies like Dangdang.

The skid is showing up in the valuation of Internet stocks from large players like Baidu.com (NAS: BIDU) and NetEase.com to smaller ones along the lines of Renren and Sohu.com (NAS: SOHU) .

Value is what you getWhile Dangdang forecasts 40% growth in revenues next year, the consensus analyst view is $1.1 billion in revenues, or a 38% growth rate. Once again, however, even Dangdang's estimate would be below the 42% increase projected for this year. And that may just be because its marketplace is a fairly limited collection of books and media items, not the sprawling supermarkets of its rivals. In one such as Amazon, it enjoys average revenue per user north of $540; Dangdang realizes just $34 per user.

The challenge for investors is whether they are willing to suffer through the near-term margin contraction in hopes that it will become a sticky site down the road, one that can regain the growth trajectory it once new. Intuitively you'd think the size of China's marketplace would permit that to happen, but as consumers are finding out there, the country was only able to ignore the laws of economics so far. Now the tab is coming due, but you can tell me in the comments section below if you think E-Commerce China Dangdang will be able to sell itself to the market once more.

A sky-high opportunityNot just Chinese stocks have come a cropper; social media stocks have turned out to be way less than meets the eye. For even more on whether they might be worthy of a spot in your portfolio -- or not -- grab yourself a copy of brand-new premium research reports on Facebook. You'll also get free updates for a year as it reports earnings and other developments in its businesses occur. Sign up for your copy today.